Introduction

Considering selling your business? It’s a major decision that requires careful planning and strategic thinking. Before taking this significant step, it’s essential to understand the various aspects that can influence the success of the sale. From ensuring that selling is the right choice for your unique situation to deciding what aspects of your business to include in the sale, each step is crucial. This article provides key insights into preparing your business for sale, including engaging professionals, conducting due diligence, valuing your business accurately, and understanding the legal and financial implications involved. By delving into these critical areas, you’ll be better equipped to navigate the complexities of the sales process and position your business for a successful transaction.

Thinking of Selling Your Business? Key Considerations to Sell a Business 

Make Sure Selling is the Right Decision

Before deciding to sell your business, it’s crucial to thoroughly evaluate the reasons behind your decision. Potential buyers commonly inquire about the motivation for selling, so having a clear and justifiable reason is important. If financial difficulties are prompting the sale, seeking professional advice from a business adviser is advisable. This expert can help assess whether selling is indeed the best solution for your situation.
It’s also essential to be aware of the potential obligations that may arise from selling your business. These could include responsibilities towards employee entitlements or tax liabilities resulting from the sale of business. Understanding these implications helps in preparing for a smooth transition and avoiding unexpected financial burdens post-sale. This step ensures that you make an informed decision that aligns with both your personal and business objectives.

Decide What’s for Sale

Before listing your business for sale, it’s crucial to decide on the inclusion of both tangible and intangible assets, as these can significantly influence the sale’s attractiveness and price.
Tangible Assets involve physical items and those with clear monetary value. Considerations should include whether there’s a rental bond on the premises to be paid out, the amount owed by debtors, and if selling the business ‘as is’ (including all operational assets) is feasible, potentially raising the asking price. Assess if there are any assets, like a vehicle, you wish to retain, or if selling certain assets separately could yield a higher return or help pay off business debts, making the business more appealing to buyers. Remember, any outstanding debts on assets of the business need to be settled from the proceeds of their sale. If you own the business premises, decide whether to include the building in the sale.
Intangible Assets are non-physical but hold value due to their income-generating potential, such as goodwill, brand recognition, and intellectual property (IP) like patents, trademarks, and copyrights. These assets can considerably enhance your business’s value and appeal. When deciding on intangible assets, consider whether to sell IP associated with the business, bearing in mind this may restrict your future use of the same IP. Evaluate if selling the customer or membership database is feasible, ensuring compliance with privacy laws and contractual terms. Also, consider any ongoing contracts with monetary value and the extent of goodwill and brand recognition that could increase the purchase price.
Deciding what to include in the sale is a strategic step in positioning your business attractively in the market while ensuring your interests are protected.

Engaging Professionals to Assist with Sale of Business

When preparing to sell your business, it’s highly advisable to engage with professionals like lawyers, brokers, and valuation experts. A reputable business broker can be a significant asset in this process. They are skilled in guiding you through legal and government requirements, providing insights on your business’s profitability, and keeping you informed about current market trends in your industry. Accountants can help get your financial affairs in order and offer advice on fiscal matters related to the sale, while solicitors handle the legal aspects, ensuring all paperwork and legal requirements are correctly managed. It’s crucial to thoroughly check the credentials of these professionals to confirm their reliability and reputation before engaging their services. This professional assistance can notably simplify and de-stress the process of selling your business.

Due Diligence Before Sale of a Business

Engaging in a thorough Sellers Due Diligence process, ideally with the help of a commercial lawyer, is a critical step in preparing your business for sale. This process involves a comprehensive review of the business, its assets, and business relationships to identify and resolve any potential issues before the business is put on the market. Key aspects to consider in Sellers Due Diligence include:

• Business Name and Trademarks: Verify that the business name and any trademarks are correctly registered to the seller. This is crucial, especially if previous business partners are involved or if there has been an oversight in registration.
• Discharge of PPSR Charges: Clear any old Personal Property Securities Register (PPSR) charges, such as those from previous supply arrangements. This step is important to avoid providing covenants to the buyer or causing delays in settlement.
• Document Key Contracts: Ensure that all significant customer and supply agreements are formally documented. Handshake agreements hold no value for buyers, so it’s important to have written contracts.
• Lease Issues: Address any issues related to your business lease. Potential buyers may back out if they find the lease terms unsatisfactory, overly burdensome, or too short, with no options for renewal or unwillingness from the landlord to offer a new, longer-term lease.
• Review Employment Contracts and Other Agreements: Conduct a review of current employment contracts, supplier arrangements, client agreements, and any licenses and permits needed to operate the business.
• Financial Review with Accountant: Work closely with your accountant to review the financial aspects of your business. Clear, organised, and ready finances are essential, as discrepancies or disorganisation in this area can quickly deter potential buyers.

Engaging in Sellers Due Diligence helps in identifying and resolving issues that could potentially hinder the sale process, ensuring that your business is presented in the best possible light to prospective buyers.

Valuation of Business

Valuing your business is a critical step in setting the right price for sale, and it involves assessing how much your business is worth. There are several common methods for business valuation:

• Market Analysis: This method involves comparing your business to similar businesses currently on the market or those that have recently been sold. While not a formal valuation technique, market analysis can provide a rough estimate of the potential market price of your business. It helps in understanding how your business stacks up against competitors and similar entities in terms of pricing.
• Net Worth Calculation: This approach focuses on the financial status of your business. It involves calculating the net worth by comparing the business’s assets (what it owns) and liabilities (what it owes). This calculation should include both tangible assets, such as machinery, buildings, and land, and intangible assets like goodwill, brand recognition, and intellectual property. The difference between these assets and liabilities gives an insight into the financial health and value of the business.
• Return on Investment (ROI) Method: This method uses the net profit of the business to determine its value. By analysing the return on investment, you can gauge the profitability and potential future performance of the business. This method is particularly useful for investors or buyers who are interested in understanding the earnings they can expect relative to the investment required.

Each of these methods offers a different perspective on the value of a business, and choosing the right one depends on various factors, including the nature of the business, the industry it operates in, and the purpose of the valuation. A comprehensive valuation often involves considering multiple methods to arrive at a well-rounded understanding of the business’s worth.

Have Basic Documents in Place

Having the necessary basic documents readily available is crucial when selling your business, as the lack of prompt information can quickly deter potential buyers. Here’s a checklist of the most common documents that buyers typically request:

• Financial Statements: Often the first thing a buyer will ask for, you should have profit and loss statements for at least the last three years. Work with your accountant to clearly delineate personal expenses, owner’s wages, and superannuation contributions. Also, keep your year-to-date figures handy and ensure all records, like BAS statements, are up to date.
• Lease or Property Details: Information regarding the business premises, whether leased or owned, is critical. This includes lease agreements or property ownership documents.
• Staff Details and Wages Summary: A comprehensive summary of your staff, including roles, wages, and contracts, provides insight into the workforce that the buyer would inherit.
• Assets List: A detailed list of all assets included in the sale, both tangible and intangible, helps the buyer understand what they are getting.
• Other Legal and Regulatory Compliance Documents: Ensure you have all relevant legal and regulatory documents, such as:
  • Business name registration certificate.
  • Australian Business Number (ABN) and Australian Company Number (ACN) registration.
  • Goods and Services Tax (GST) registration.
  • Insurance papers.
  • Market evaluation of the business.
  • Partnership agreements, if applicable.
  • Buy-sell agreements.
  • Retirement payout agreements.
  • Contracts relevant to the operation of the business.
  • Wills and testaments.
  • Resumes of potential successors, if relevant.

Having these documents organised and readily accessible will significantly streamline the process and demonstrate to potential buyers that your business is well-managed and ready for transition. This preparation can positively impact the perceived value and attractiveness of your business to prospective buyers.

Selling My Business: What Does the Process Entail?

Offer for Sale of Business

When you receive an offer from a potential buyer for your business, it’s typically either through a written letter or a verbal proposition. It’s advisable to favor a written offer, as this clearly documents the principal terms and reduces the risk of misunderstandings later. If you decide to accept the offer, it’s important to do so in writing. In your written acceptance, clarify that the agreement to sell is not legally binding until both parties enter into a formal Contract for Sale of Business. This early communication should also address crucial aspects of the sale, like the price, assets included, employee transfer arrangements, any conditions such as financing or due diligence requirements, training provisions included in the sale, and any non-compete clauses.

Contract for Sale of Business

When selling your business, the process of drafting and exchanging the contract is a critical phase. Here’s how it typically unfolds:

• Contract Drafting: Often, an intermediary or a broker is involved in drawing up the initial sale contract. However, it’s important to verify any specific requirements for preparing your contract based on your state or territory.
• Legal Review: Having a solicitor check the contract is highly recommended. The solicitor ensures that the contract is comprehensive and doesn’t contain any false statements. They will review all aspects of the sale, including:
• Transfer of relevant assets such as property, equipment, stock, and rights to use any names.
  Inclusion of relevant liabilities like creditors and lease obligations.
• Arrangements concerning employees and their entitlements, including transfer conditions.
  Provisions for handling potential issues, such as the buyer backing out or errors in the contract.
• Non-Compete Clauses: Be aware of any clauses in the contract that restrict you from trading in your profession post-sale. These are often included to prevent competition against the business you have sold.
• Engaging a Lawyer: Once the principal terms of the sale are agreed upon, it’s crucial to engage a lawyer, if you haven’t already done so. If a formal written offer and acceptance are already in place, this can expedite the process since many sale details will have been pre-negotiated. Your lawyer will ensure the contract reflects your intentions for the sale and represents you in further negotiations with the buyer or their legal representatives.
• Finalising the Contract: The lawyers representing both parties will finalise the Contract for Sale of Business, preparing it for execution. During the formal exchange of the contract, the purchaser typically pays a deposit.

Throughout this process, it’s essential to stay informed and actively involved, ensuring that all terms and conditions align with your expectations and interests in the sale.

Settlement of Sale

After the contract for selling your business has been exchanged, the next crucial step is preparing for settlement. This involves ensuring the smooth transfer of the business’s assets to the new owner. Key items that need to be ready for transfer on or from the settlement date include:

• Telecommunications: Transfer of all telecommunications services linked to the business.
• Client Lists: Provision of complete and updated lists of clients to the new owner.
• Employee Details: Handover of detailed information about all employees, including their roles, contracts, and entitlements.
• Leases, Licenses, and Permits: Ensure that all leases, licenses, and permits are valid and transferable, and that any necessary steps are taken to transfer them to the new owner.
• Business Names: Transfer the registration of the business name to the new owner, ensuring compliance with legal requirements.
• Security Interests and Encumbrances: Any existing security interests or encumbrances against the business or its assets need to be discharged or released. This is important to ensure that the business is transferred free of any liens or claims.
• Personal Guarantees: If you have provided personal guarantees, especially concerning the lease of the business premises or other contracts, you should ideally seek their release on or before the settlement date to ensure a clean break from the business.

It’s important to meticulously manage these aspects to ensure a smooth transition of ownership and to fulfill all contractual obligations under the sale agreement. Proper preparation for settlement is key to concluding the sale of your business efficiently and effectively.

Post-settlement

After the sale of your business, there are several post-settlement tasks that need to be addressed to fully finalise the sales process:

• Registering Transfers: This involves the formal transfer of business assets and other legal documents to the new owner.
• Finalising Tax Obligations: You’ll need to complete any outstanding tax returns, activity statements, and instalment notices. This includes addressing any Capital Gains Tax (CGT) or Goods & Services Tax (GST) implications of the sale. For small businesses, CGT concessions may be available. If your business is registered for GST, this may need to be factored into the price of individual business assets, or you may need to repay GST credits. If there are tax obligations arising from the sale, it’s crucial to plan for them to avoid debt. The Australian Taxation Office (ATO) offers payment plans for those unable to pay taxes on time.
• Cancelling ABN and Business Name: If appropriate, cancel your Australian Business Number (ABN) and your business name registration.
• Employee Transition: Communicating with your employees is essential. Inform them whether they will be transferring to the new owner or if their employment will end due to the sale. In both scenarios, a transfer of business ends their position with you, necessitating notice of employment termination or payment in lieu of notice. When employees transfer with the business, ensure to provide all relevant employee information to the new owner. Note that some employee entitlements must be recognised by the new owner, while others may not.
• Insurance Considerations: Post-sale, consider any ongoing insurance requirements, such as run-off cover, which insures against legal claims made after the business is sold.

Conclusion: Cover the Legal Aspects of Selling Your Business

Selling your business is a multifaceted process that demands attention to detail and a comprehensive understanding of various legal, financial, and operational considerations. Whether it’s deciding what’s for sale, engaging the right professionals, conducting thorough due diligence, or understanding the nuances of valuation, each step plays a pivotal role in the success of your business sale. Remember, having the necessary documents in place and understanding the nuances of the settlement process are key to a smooth transition. If you’re thinking about selling your business and need expert legal advice to navigate this complex process, our team at PBL Law Group is here to assist. We specialise in business sales and can provide the legal expertise and support needed to ensure a successful transaction. Contact us now!